Indian export-oriented information technology (IT) and business process outsourcing (BPO) firms may be grappling with an appreciating rupee and clouds of doubt looming over the extension of tax sops for the sector beyond 2009.

However, the business of BPO firms that cater to the domestic market appears to be booming. BPO demand in the domestic market has witnessed noticeable growth over the past few years.

An Everest-Nasscom study points out that the domestic BPO market, with a growth rate of 50 per cent over the last five years, has grown faster than the overall Indian BPO market to reach nearly $1.6 billion (Rs 6,400 crore) by end of FY2008, against an overall BPO revenue of around $11 billion.

The potential opportunity in the domestic BPO sector is expected to be $15-20 billion by 2012 compared with the $50 billion projected for the overall BPO sector by 2012.

Jimit Arora, senior research analyst, Everest Research Institute, notes there is a definite increase in the interest among vendors across the board to pursue the opportunity for domestic BPO.

Global IT services player IBM has already cannibalised the home turf by winning multi-million dollar deals in India. Taking the cue, BPO players too are gearing up for the exponential growth.

For instance, Infovision, India's third largest BPO firm catering primarily to the domestic market is looking to more than double its headcount to 25,000 over the next two years.

"We are currently a Rs 250 crore company with about 70 per cent of our business coming from domestic operations. We are aiming to increase this four-fold to Rs 1,000 crore by 2010," said Aditya Gupta, president, Infovision.

Added Ramachandra Panickar, CFO, Intelenet Global Services, "Our domestic BPO revenues are around Rs 240 crore. We expect the market to grow at over 50 per cent per annum in the next two years. We employ over 15,000 people across seven locations in India, which we plan to increase by 20 to 30 per cent a year".

"This market depends on the economies of scale. Many contracts are given on the basis of the reputation of the company. The country is going through an inflection point where the customers are willing to pay, but it is still at a growing stage so the companies are looking at bigger domestic players," said Aparup Sengupta, CEO and Managing Director of Aegis BPO.

Radhika Balasubramanian, COO - India Domestic BPO Business, Intelenet Global Services, noted: "The tremendous growth potential in the domestic BPO market and opportunity to derisk revenue model by providing a balance between international- domestic revenue have spurred international BPOs to enter the domestic market. We see a huge potential here. We have no intentions of making our international business more dominant than our domestic business."

Similar sentiments are echoed by Sengupta who said, "With consumer spending on the rise in India, our business will also receive an indirect boost, so we intend on keeping half our revenues coming for our domestic business."

Ameet Nivsarkar, VP, Nasscom added that the domestic BPO market has witnessed an over 40 per cent growth last year, and "we expect it to continue especially with the growing economy".

Is their optimism well-founded, given that BPOs do not get any tax benefits from their domestic revenues, and the income is taxed at the normal 33 per cent? The cost pressures on a domestic BPO are lower than the international businesses, notes Nivsarkar.

Moroever, their skill requirements are different. For a domestic BPO fluency in a local language as well as a national language is needed, due to which they can easily shift to a smaller city without much difficulty. This would help ease cost pressures as well.

Analysts also explain that catering to international markets give companies margin of at least 20 to 30 per cent whereas back home it is 12-13 per cent. However, while the margins of a domestic BPO are marginally lower than an international BPO, it's the volume, size and scale that comprise the differentiating factors.

Anish Zaveri, associate director, KPMG Advisory, explains: "The two main investments in any BPO are infrastructure and manpower. These are relatively less expensive for a domestic BPO given the lower salary structure, lower cost of training and business development expenses. They also have the ability to move to lower cost tier-2 and tier-3 cities with greater ease."

The salary structure for a domestic BPO employee is almost 30-35 per cent lower than an international BPO employee.

He adds: "The efficiency rate in the domestic BPO space is also much higher than its international counterpart. Utilisation ratios are also better. All these factors culminate to lower capital costs."

Moreover, as the country reaches new high points in its various industries like telcom, retail and hospitality it throws up new opportunities for the domestic BPOs as well.